Update Ormat Technologies (ORA)

04/22/2010 3:07 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Ormat Technologies (ORA) has been on a very slow recovery track since it hit a low of $27.76 on March 29. The shares were up about 12% as of 2 p.m. ET on April 22, 2010, to $31.08. That still leaves the stock a lot of work to do before it gets back to the $41.08 where I bought shares for Jubak’s Picks on November 17, 2009.

Ormat Technologies shares crashed on a February 23 announcement that it would restate its financial statements for all of 2008. The company had concluded that its accounting treatment that capitalized certain exploration and development cost was inappropriate and that the company, at the SEC’s urging, expense these costs. That will have the effect of moving these costs onto the company’s books much more quickly.

The news generated a rush to court with lawyers filing class action suits in behalf of shareholders charging that the company, in the language of one suit, “recklessly disregarded that their public statements concerning Ormat's business, operations and prospects were materially false and misleading. Specifically, defendants made false and/or misleading statements and/or failed to disclose: (1) that the Company was improperly continuing to capitalize costs for individual projects after Ormat had decided to abandon further exploration and development of individual projects instead of expensing those costs in the period in which any such determination was made; (2) that, as a result, the Company's financial results were overstated during the Class Period; (3) that the Company's financial results were not prepared in accordance with Generally Accepted Accounting Principles (GAAP); (4) that the Company lacked adequate internal and financial controls; and (5), as a result of the above, that the Company's financial statements were materially false and misleading at all relevant times.”

Nothing good for the share price in either Ormat Technologies news or in the flurry of lawsuits. I take the law suits seriously. After all in the period that the suits name, May 6, 2008 to February 24, 2010, the share price fell from $50 to $22. Multiply that by the 45 million shares outstanding and you’ve got $900 million in losses to investors. That’s a lot for a company with annual sales of just $415 million.

But most class action suits never go to trial, getting settled for a payment far below the alleged damages. In those that do go to trial the final award is seldom equal to the alleged extent of shareholder losses.

Especially when as in the current situation, part of the decline in the stock was due to a general collapse of the stock market. Remember that the stock market didn’t hit a bottom until March 2009. Good luck collecting on the drop in Ormat’s share price from May 2008 through March 2009.

And then there are sound fundamental business reasons for the decline in the company’s stock since May 2008. Fundamental problems that increasingly seem behind the company.

Ormat has had problems with its North Brawley geothermal power plant that have kept it from reaching full capacity power production on schedule. The plant went into service in January 2010 but has had to send an additional $15 to $30 million to fix problems at the plant.

The company’s Puna plant started to show declining steam production from its underground geothermal reservoirs that reduced power production. The fix required the company to drill one well and drill several new wells.

And finally the company and its partners faced unexpected delays in getting a payment rate established for its Sarulla plant in Indonesia that have delayed initial construction. The battle over the rate that Ormat would get for its electricity from the Indonesian state electric utility raised fears that the plant’s construction was going to be more expensive than originally anticipated.

Because of all these problems projected revenue at Ormat looks to be somewhere in the neighborhood of $370 million a big decline from 2009 revenue of $415 million.

But even if the class action suits aren’t behind Ormat, the fundamental problems seem to be. North Brawley is on track for full capacity by the end of 2010. The fixes at Puna are running ahead of schedule. And Ormat has finally reached a pricing agreement in Indonesia that, when signed, will pay Ormat about 50% more than the Indonesia state utility had promised the company that originally began—and then abandoned—the Sarulla plant.

Capstone Investments, one of the few investment companies that cover Ormat, projects that 2011 revenue will climb to $560 million from 2010’s $367 million.

So I’m holding on. I don’t like getting pummeled like this. I don’t like accounting surprises. I don’t like the uncertainty—and the distraction to management—caused by the class action suits.

But Ormat is still, in my estimation, the best global pure play in geothermal energy production. At $31and change a share on April 22 Capstone calculates that the stock is trading at the replacement value of the company’s current generating assets without any premium for the 280 Megawatts in planned projects or the value of its equipment manufacturing business.

I think it would be optimistic to expect anything other than a slow recovery in price given the uncertainties that still hang over this company, but I do think a recovery is in the works. As of April 22, I’m keeping my target price of $38 a share but stretching out the schedule to April 2011 from December 2010.

Full disclosure: I own shares of Ormat Technologies in my personal portfolio.
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